An Insider On The Nortel Patent Auction And Its Consequences

From smartphones to tablets, Wi-Fi to 3G/4G: I cover telecom & mobile.

Google's bid for Nortel's collection of technology patents was ill-fated early on, says a fellow bidder in the $4.5 billion auction, which concluded last week. The record amount of money raised may also spur other tech companies to sell their intellectual property, according to patent protection company RPX Corp.

RPX Corp. participated in Nortel's June patent auction

Nearly a week after its conclusion, the IP auction held by bankrupt wireless gear maker Nortel continues to attract fascination. Why didn't cash-rich Google bid more? Why did rivals Apple, Microsoft and Research In Motion band together -- along with three other companies -- to submit a winning offer? How will Nortel's more than 6,000 patents, which address multiple areas within telecommunications, be utilized after the sale gets regulatory approval?

Most of the companies involved in the auction, including all six of the winning companies, have declined to discuss the event and their subsequent plans. San Francisco-based RPX, which took part in the auction, was willing to share some observations, however.

Though early media reports pegged Google as the frontrunner, based on the $900 million "stalking horse" bid it submitted back in April, RPX Chief Executive John Amster says other auction participants soon spotted Google's weak position. "We never once thought Google could win it," said Amster in an interview.

RPX CEO John Amster

The reason: a number of other companies clearly wanted to both own the patents themselves and keep them away from Google. Once enough large companies (Apple, EMC, Ericsson, Microsoft, RIM and Sony) united against Google, it "became very clear…that the combination of those balance sheets would be much more powerful than what Google had on its own," said Amster.

Most participants didn't enter the late June auction intending to partner up. (RPX, which headed a consortium of 20-some tech companies called NORPAX was an exception.) But the bidding quickly grew high enough that participants recognized they needed to join forces to prevail. "At a certain point, people realized that a single company wouldn't end up owning [all the patents]," said Amster.

The competition knocked RPX's group out of contention. "Prices...got to a level where owning the patents became much more important and having them be purely defensive became not viable," explained Amster. As a defensive patent aggregation service, RPX only purchases IP as a protective measure for its clients. That means that RPX does not use its patent portfolio to pursue lawsuits. Accordingly, RPX does not spend outsize sums on IP with the expectation that it will make back the cost through large settlements. The company's record backs this up. Since its 2008 founding, RPX has spent $260 million on about 1,500 patents.

Was $4.5 billion a fair price for the Nortel assets? Though Amster calls the sum a "shockingly big number," he noted that the patents hold strategic value that is difficult to quantify. "Each company had different reasons why they didn't want Google to own the patents," he said. "The value was driven by the desire to ensure [that wouldn't happen]."

The many patent suits flying around the tech industry were another intangible factor in the auction bids. Amster said Nortel's patent trove was likely viewed as a "strategic element" by companies that are wrestling with lawsuits and settlement discussions. "It could change the balance of some of these ongoing litigations and cross-license discussions," he said.

The patents' value isn't completely theoretical. Amster believes at least some of the winning companies will license their new IP. He is skeptical, however, that the patents will pay for themselves. Saying the patents will be able to generate $4.5 billion or more in licensing fees is a "dangerous assumption," he added. Doing so, he reasoned, would assess the patents at a price higher than many companies' entire worth. And that could have unwelcome repercussions for the mobile communications market or even the entire tech industry, he said.

There may be other ramifications due to the auction's outsize profits and publicity. Amster expects some companies that previously were not interested in selling their patents will now try to cash in like Nortel. (The Nortel proceeds will benefit the company's creditors.) That could create inflation in the patent market.

At the same time, Amster anticipates the impact will be relatively limited. Nortel's auction was an exceptional event, he pointed out. First, it involved an unusually large collection of patents. Secondly, the patents were considered especially valuable because they covered more than 100 years of research and development, including up-and-coming technologies like 4G/LTE. Third, the auction was expedited by Nortel's bankruptcy proceedings and the involvement of the Canadian courts.

In comparison, future patent transactions are likely to be smaller in scale, draw less attention and progress more slowly, said Amster. "These were fairly unique circumstances," he said.

What is not unique is tech patent litigation and the corresponding interest in patents for defensive and offensive purposes. RPX estimates that the number of suits in the areas it focuses on (consumer electronics, e-commerce, media, mobile communications, networking and semiconductors), steadily rose throughout 2010. "Litigation is increasing," said Amster. "More value is being placed on patents in general."

In a way, these trends, which RPX says are being driven by the consumer electronics and mobile communications markets in particular, benefit RPX. The company currently counts more than 80 tech firms as customers, including Cisco, Dell, Hewlett-Packard and Qualcomm. Most of the large mobile device makers, such as HTC, LG, Nokia, RIM and Samsung are also RPX members.

RIM's inclusion in the winning Nortel consortium doesn't carry any advantages for RPX, however. Large companies like RIM often rely on RPX for certain transactions but also pilot their own IP strategies, Amster explained. "We're one arrow in the quiver for these companies," he added.

Technology is going mobile and I'm here to cover the shift. En route to the Forbes gadget beat, I worked at Business Week, Time Asia and Random House. I also lived in South Korea and Hong Kong, where I quickly acquired a taste for fast broadband and sleek phones. Now I'm a ...